While demand for US Treasuries remains brisk at primary auctions (if more questionable in the secondary market where we recently learned that Russia dumped half of its Treasury holdings, or almost $50BN, in April), the same can hardly be said for the short-end of the market, where moments ago we saw what happens to auction demand in a time of rapidly rising rates.

As shown in the chart below, while the yield on 3 Month Bills auctioned off today came in largely as expected at 1.940%, the demand did not, and after an already depressed Bid to Cover of 2.89 last week, today's 3M auction suffered from one of the lowest demands on record, tumbling to just 2.62, with $125.88BN in bids tendered for $48BN in paper, down sharply from $138.87BN on June 25. In context, this was the lowest Bid To Cover in the past ten years, and one would have to go back all the way to the post-Lehman days of 2008 to find a lower BTC.

(Click on image to enlarge)

And with both T-Bill issuance continuing to surge, and rates rising, two things are certain: not only will the Libor-OIS spread resume blowing out amid the continued surge in short-term supply and increasingly tighter financial conditions, but demand will continue to slide, although the good news is that we are still well off from the record lows, in which auctions were only 2.0x covered at the start of the century. That said, who knows: perhaps the break in the bond market will begin with a failed Bill auction as the US Treasury finds it increasingly difficult to roll over short-term debt.

What we do know is that today's sloppy 3-Month auction follows an equally ugly 6-Month Bill sale on June 18, when it took saw the second lowest BTC print this decade. The result: two unexpectedly ugly Bill auctions two weeks apart from each other as demand for cash-equivalents suddenly flees.